Credit Card 101

Credit cards are an important part of building credit history. The card also provides convenient purchasing power and helps limit the amount of cash you carry. These benefits come with a degree of responsibility. It is important that you understand the terms offered by a credit card company before accepting a card from them.

Credit Card Definition

• A credit card is the symbol of an open line of credit between you and a lending organization. This can be a bank or other private institution. The bank or private entity agrees to extend you a certain amount of credit under the conditions that you pay off some or all of the balance at the end each month. In return for extending this offer to you, the organization charges an interest rate on the balance your card carries from month to month.

Interest Rates and Fees

• The interest rate attached to a particular credit card is usually determined by your credit rating. Your credit rating is determined using your history of paying bills on time, your debt-to-income ratio and how responsibly you've used credit extended to you in the past. A credit card company may charge other fees based on how much of a balance your card carries from month to month. According to Bankrate.com, as of 2009, credit card companies are allowed to raise your credit card's interest rate only if you make late payments or the card already has a variable rate or if a promotional interest rate period ends.

Credit Card Benefits

• Using a credit card responsibly and paying off its balance at the end of every month can help establish a positive credit history. This can be beneficial when it comes to securing larger lines of credit, such as a car or home loan. A good credit score built through responsible credit card usage can lead to a lower interest rate on other loans, literally saving you thousands of dollars. A credit card can also be useful when traveling abroad, as it allows you to make purchases without having to directly exchange cash.

Minimum Payment Amounts

• Each month you get a bill from your credit card company if you have a remaining balance from purchases made using the card. Your credit card company may indicate a "minimum payment amount," which is the smallest amount of money you have to pay to keep the account in good standing. Paying only the minimum amount each month may end up costing you more than the total balance on the card. As of 2009, federal law requires credit card companies to tell you how long it will take you to pay off the balance on a credit card by paying only the minimum amount each month.

Pitfalls of Credit Cards

• Credit cards make it easy to purchase items you may not otherwise be able to afford. Buying these high-ticket items when your actual income does not support owning them is a trap that can easily land you in a heap of debt. This can lead to missed payments, which may damage your credit rating years beyond any benefit a large-ticket purchase may have provided. Once a credit card company reports a late payment to a credit bureau, it remains on your credit history for at least seven years.